Is China Complicit in North Korean Currency Counterfeiting?

When it comes to
North Korea, the United States has concerns about more than just
nuclear weapons. For over 25 years, Pyongyang's state-supervised
currency printing plants have been churning out high-grade
counterfeit U.S. dollars as well as counterfeit Japanese yen, Thai
baht, and in recent years, euros. A more recent concern is the
increasing evidence that China has not been an innocent bystander
in North Korea's traffic in bogus bills.

In the 1990s,
Pyongyang purchased advanced high-speed banknote presses similar to
those used by the U.S. Bureau of Engraving and Printing and began
to print extremely high-quality copies of foreign currency notes
dubbed "supernotes" by the U.S. Secret Service. The Economist
Intelligence Unit estimated in 2003 that North Korea earned as
much as $100 million a year from counterfeit currency.[1] In 2005, an interagency
U.S. task force broke a number of North Korean counterfeit cases.
The task force estimates that $45 million to $60 million in
Pyongyang's counterfeit currency (primarily in U.S. $100 bills) is
in circulation today.[2]

China enters the
picture through Macau. Prior to 2000, Macau was under Portugal's
colonial administration. In 1994, Portuguese police arrested
several North Korean trading company executives, who carried
diplomatic passports, for depositing $250,000 in counterfeit notes
in a Macau bank.[3]
Otherwise, counterfeit currency laundering there was not
pronounced. This began to change sometime after control over the
area was transferred to China in late 1999 and it became the Macau
Special Administrative Region. From that time until September 2005,
when a U.S. law-enforcement case known as "Operation Smoking
Dragon" traced a large quantity of counterfeits to a Macau bank
known as Banco Delta Asia, North Korea's state-run global
money-laundering operations were based in Macau.[4]

The United States
Treasury Department quickly imposed strict financial sanctions on
Banco Delta Asia, naming it as a "a willing pawn for the North
Korean government to engage in corrupt financial activities through
Macau, a region that needs significant improvement in its
money-laundering controls." [5]
Although a Treasury spokesperson was candid about the Banco Delta
Asia sanctions, she had "no comment" about whether Treasury was
also investigating Beijing's Bank of China branches in Macau.[6] U.S. law enforcement
officials involved in the "Smoking Dragon" case were initially
frustrated by a Justice Department decision, apparently made for
diplomatic reasons, not to name China and North Korea as the
sources of counterfeit currency and other goods. Oddly, indictments
in an August 2005 counterfeiting case referred to source countries
only by numbers.[7]
North Korea was subsequently named, but China's role remains
shrouded.

Macau sources told
U.S. officials that when Banco Delta Asia ceased passing supernotes
for Pyongyang, North Korea's agents moved their accounts to Chinese
state-owned banks in the Zhuhai Special Economic Zone adjacent to
Macau.[8] According to the Los
Angeles Times, immediately following the U.S. Treasury action
in Macau, North Korea's flagship front-company there, Zokwang
Trading Co., closed its headquarters on the fifth floor of an
office building near Banco Delta Asia, and "most of its personnel
have relocated to Zhuhai, just across the border in China
proper."[9]

Another intriguing
piece in the North Korean counterfeit supernote puzzle came in
October 2005 when U.S. prosecutors indicted Sean Garland, a member
of Ireland's radical left, for procuring supernotes directly from
North Korean officials.[10]
Garland's connections in China had long been a focus of U.S.
criminal surveillance. According to "top secret" U.S. intelligence
reporting, reportedly based on telecommunications intercepts by the
National Security Agency, Garland may have been introduced to his
North Korean contact in 1997 by a Chinese Communist Party official,
Ms. Cai Xiaobing, while visiting Beijing. Ms. Cao was identified as
director of the International Liaison Department, the bureau within
the Chinese Communist Party structure that supports communist
parties abroad. U.S. intelligence analysts reportedly believe that
the "unidentified business opportunities" that Garland discussed
with Ms. Cao related to North Korea.[11]

A clear trail of
supernote American $100 bills extends through China and back to
North Korea. In February 2006, South Korean police arrested three
people who had purchased supernote counterfeits with a face value
of $140,000 from "a broker in Shenyang, China."[12] That same month, a
South Korean legislator said he had obtained Series 2003 supernote
counterfeits in the Chinese city of Dandong. "I paid $70 to get
each of these [counterfeit $100 bills], but you can get them for as
little as $50 in China," the legislator told a South Korean
parliamentary meeting.[13]
And much earlier, in 1994, U.S. Secret Service investigators had
tracked the chief of the North Korean counterfeiting ring to China
where, according to press reports, "the trail went cold"-at the
least an indication of a lack of Chinese police cooperation.[14]

In 1998, the
Japanese Navy seized a North Korean spy-ship with a multi-million
dollar consignment of supernote U.S. and Japanese currency.[15] Since then, Japanese
maritime forces have been alert to the movements of North Korean
ships in their waters. By December 2001, Japanese and American
intelligence officials had become aware that North Korean spy-ships
were regular visitors to Chinese naval bases.[16]

Conclusion

A considerable
amount of circumstantial evidence points to Chinese complicity in
North Korea's counterfeit currency networks. The nature of the
evidence, especially the ease with which North Korean
counterfeiters were able to relocate from Macau to more secure
offices inside China, indicates that China gives aid and asylum to
North Korean counterfeiting operations as a matter of policy. If
so, there is little hope that North Korea's criminal activities can
be brought to heel until China changes its ways-whether by
diplomacy or by litigation of its banks and officials.

Administration
law-enforcement and intelligence agencies must be encouraged to
brief Congress on the extent of Chinese cooperation with U.S.
investigations into North Korean counterfeiting-or the lack
thereof. U.S. prosecutors, meanwhile, must be encouraged to pursue
leads involving Chinese complicity.

John J.
Tkacik, Jr., is Senior Research Fellow in China Policy in the
Asian Studies Center at The Heritage Foundation.

[3] See prepared statement
of William Bach, Bureau for International Narcotics and Law
Enforcement Affairs, Department of State, "Hearing on Drugs,
Counterfeiting and Arms Trade: The North Korean Connection," before
the Senate Committee on Governmental Affairs Subcommittee on
Financial Management, The Budget, and International Security, May
20, 2003.